Heterogeneous Consumers, Segmented Asset Markets and the Real Effects of Monetary Policy

This article proposes a novel mechanism by which changes in the distribution of money holdings have real aggregate effects. I develop a flexible-price model of segmented asset markets in which monetary policy influences the aggregate demand elasticity via heterogenous money holdings. Because varieties of consumption bundles are purchased sequentially, newly injected money disseminates slowly throughout the economy via second-round effects. The model predicts a short-term inflation-output trade-off, a liquidity effect, countercyclical markups, and pro-cyclical wages after monetary shocks. Among other correlations of financial variables, it also reproduces the empirical, negative relationship between changes in the money supply and markups.

FIRM DYNAMICS, ENDOGENOUS MARKUPS, AND THE LABOR SHARE OF INCOME

Recent U.S. evidence suggests that the response of labor share to a productivity shock is characterized by countercyclicality and overshooting. These findings cannot be reconciled easily with existing business cycle models. We extend the Diamond–Mortensen–Pissarides model of search in the labor market by considering strategic interactions among an endogenous number of producers, which leads to countercyclical price markups. Although Nash bargaining delivers a countercyclical labor share, we show that countercyclical markups are fundamental to address the overshooting. On the contrary, we find that real wage rigidity does not seem to play a crucial role in the dynamics of the labor share of income.

INTEREST RATE RULES AND EQUILIBRIUM STABILITY UNDER DEEP HABITS

This paper studies the determinacy of equilibrium in a new Keynesian model with deep habits under different interest rate rules. The main finding is that an interest rate rule satisfying the Taylor principle is no longer a sufficient condition to guarantee determinacy. Including interest rate smoothing and a response to output deviations from steady state significantly enlarges the regions of determinacy. However, under all the simple interest rate rules considered, determinacy is not guaranteed for a very high degree of deep habits. Deep habits give rise to countercyclical markups, which is in line with empirical evidence and makes them an appealing feature in the study of demand shocks. The countercyclicality of markups also leads to multiple equilibria because of self-fulfilling expectations for a high degree of deep habit formation.

What Inventory Behavior Tells Us About Business Cycles

The countercyclical pattern of inventory-sales ratios is a striking feature of inventory behavior. In a model where inventories are productive for sales, both the markup of price over marginal cost and expected changes in marginal cost are key determinants of that ratio. This paper argues that costly variation in factor utilization gives rise to countercyclical markups in production-to-stock manufacturing industries. The markup turns out to be more important than intertemporal substitution in explaining the behavior of inventory-sales ratios. (JEL E22, E32)